Dynamic Cost-contingency Management: A Method for Reducing Project Costs While Increasing the Probability of Success
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In the real world, Money Allocated is Money Spent (MAIMS). As a consequence, cost underruns are rarely available to protect against cost overruns, while task overruns are passed on to the total project cost. The combination of the probabilistic aspects of project costs and the MAIMS principle have important implications for budget allocation and the management of contingencies. Project costs depend not only on the desired probability of success but also on budget allocation and contingency management. This is in contrast with both deterministic practices that allocate a percentage of the project baseline cost for contingency as well as today de-facto probabilistic cost analyses that provide a cost contingency independent of the budget-allocation strategy. The realistic modeling of cost uncertainties and the MAIMS principle provide a framework for developing a viable cost-management strategy for allocating baseline budgets and contingencies. Based on this analysis, the project manager can maintain a realistic project-wide contingency and dynamically distribute it to the individual risks on an as-needed basis. Projects that implement dynamic cost-contingency management based on these principles are likely to achieve a higher probability of success and cost less.
Proceedings Paper (for Acquisition Research Program)
NPS Report NumberNPS-AM-07-035
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